Peer to peer lending

The latest addition to my family takes up more room in the car than expected, and the old car is dying more quickly than expected, so I want to buy a new car sooner than expected. To do this I took out a small loan, and shopping around for loans I found Zopa. The feature of their loans that attracted me was the ability to repay early without penalty.

But there is more to it than that. They are a peer to peer lender. Savers can save money with Zopa, and the money is divided into £10 chunks and spread between a large number of borrowers. I can visit a web page that shows a list of the people who have lent me money. For instance, I owe £20 to John Owen in Brighton. I get a cheaper loan, and they get higher returns on their savings than could be had from a conventional savings account.

Of course, though the credit reference checks are quite stringent, there are risks. The web site Money Saving Expert points out:

Well, good! Peer to peer lending is about as Samizdata as it gets. Individuals are voluntarily lending their money to each other for mutual benefit, bearing the costs of their own risks. There is not even any fractional reserve banking to worry those who worry about such things. The interest rates are properly Austrian, being set by a market and not by the government. And the company called Zopa is making a profit doing the very valuable middleman job of dividing the labour by taking care of the paperwork and matching borrowers to lenders.

Zopa is a founder member of the Peer-to-Peer Financial Association, “a UK trade body set up primarily to ensure this innovative and fast growing sector maintains high minimum standards of protection for consumers and business customers”. A worthy idea: a voluntary membership organisation that enforces high standards among members thereby helping consumers decide who to trust.

On 24th October the Peer-to-Peer Financial Association issued a press release.

“We welcome today’s consultation by the FCA on the new regulatory regime for peer to peer lending and crowd funding.”

“Peer-to-peer lenders have been pressing for regulation for some time and believe it is important that all firms entering this important new market behave responsibly, treat their customers fairly and manage their risks.”

So now they want to take all this beautiful voluntary activity and introduce state backed violence. And they think this is a good idea. I give up.

Or, they are responding to backroom pressure from the regulators and the state, egged on by competing market sectors which are heavily regulated and want to raise the cost of market entry for their competitors.

In other words, the Bank of England, the existing high-street banks and finance companies, already in a comfy symbiotic/incestuous relationship with the regulators, leaned over and whispered in the regulators’ ears – “Isn’t it about time you started looking at this P2P lending nonsense, old boy? Can’t imagine why you’re letting these people just lend money to anybody, with no rules or anything. Really doesn’t seem wise, does it? Needs to be sifted very carefully, don’t you think? Can’t have that sort of thing going on, can we? Oh, thanks, mine’s a large Bells.”

Yes bankers can add scale and expertise and these are good things – but bankers are so in bed with the state now )although, to be fair, government does not really give them any CHOICE in this matter), that I believe the bad outweighs the good in the “financial system”.

As for the “regulation” of peer to peer lending (or cloud finance – or whatever) Perry is right – it is evil (utterly so).

By the way – I wonder where American finance will go?

To stay in New York City (after the election of the Castro lover) would be insane – indeed New York was already one of the most highly taxed and regulated places in the United States.

I think we shall see an “interesting” (in a Chinese sense) tipping point in New York City – as habit and “but everyone else is here – we can not leave” is overwhelmed by hard reality.

I do not think we will see any major banks (or the stock exchange) based in New York City in four years time.

If there is a Mayoral election in 2017 it will be fought in a wasteland (like Detroit – only vastly bigger).

Glenn Beck was wise to move his business out of New York City when he did – and Rupert Murdoch should follow suit.

In this age of technology why even move to a big city in Texas?

Why not a small city in South Dakota? If one has to be in the United States – for legal reasons (or whatever).

After all – either we are entering a computer age or we are not.

It is madness (utter madness) to have physical HQ buildings in New York City – thus leaving one’s self open to endless taxation and arbitrary regulation.

Perry and llamas have nailed it; I was going to point out those 2 theories but they have beaten me to it.
Certainly if you are a sizeable business that wants to operate in the UK you need to prostrate yourself before your lords and masters before being allowed to exist. That obeisance is the price you pay for the chance to regulate your competitors out of the market. So everybody wins (well, technically, politicians and big business win, and taxpayers and consumers lose out, but that’s near enough everybody as far as our political class is concerned).

I wrote about this in my day job a few days ago. Not a surprise: the regulatory authorities cannot bear to think that financing and investment is happening without them being able to stick their paternalistic oar in. Just look at how the FCA now tries to stamp out the marketing of any investment product deemed “unsuitable”; ie, we have the nanny state in finance.

Some of this is a hangover from the crisis; but as we can see, regulators have budgets to justify. All those officials sitting around looking for dragons to slay. Peer-to-peer funding, crowdfunding, etc, sounds just like another target for them.

One of the ironies (not an irony to a free marketeer, of course) is that the regulatory crackdown is, for example, driving thousands of financial advisors out of business and the regulator has discovered that this means that a lot of “orphan” clients who no longer can afford advice are trying to invest in a DIY fashion, with sometimes bad results. But instead of admitting that regulation has caused this, we get calls for yet more.

There are times that the only way to explain this by thinking of it as a form of mental illness.

It’s hard to tell how to read between the lines. Sure, “Gosh darn it’s a shame we’re completely unregulated” might mean “let’s establish some barriers to entry before we get too much competition”, but it also might mean “You’re thinking of calling us a ‘bank’ and bringing the hammer down on us, aren’t you? Let’s get some statements on the public record establishing that we never even imagined we might fall under existing rules and that we certainly haven’t been trying to dodge the Eye of Sauron.”

I am reminded of the South African phenomenon, particularly amongst blacks, of the “Stokvel” -a communal or syndicate savings scheme oprating like a rotating credit union- which some years ago started getting more government and media scrutiny and was being likened to pyramid schemes operated by gangsters in order to demonise it and enforce regulation. I am not sure how it all turned out since I left South Africa some 15 years ago but a quick internet search shows the concept is alive and kicking.

Meanwhile, a sad case from a tax office of peer to peer lending being a cover for fraud, a slightly misleading headline, it wasn’t a pension fund as such. You’d think that the villain had looked at the National Insurance Fund for inspiration, with some implausibly high returns from Bernie Madoff thrown in.

Some years back, I was a lender on Prosper.com, which is an American P2P site. It’s different from Zopa in that lenders can choose to direct their money to individual borrowers.

I was there after the close of the “Wild West” period as it was called, in which interest rates were totally unregulated. The consequence was that a lot of dumb money went after a lot of horrible borrowers, attracted there by interest rates north of 50%. By the time I was there, the interest rate was capped at about 30%. So some of the worst borrowers were starved out as not worth the risk, but still a lot of bad borrowers were able to get funded. I think of it as “Wild West II”.

I and many others chucked a bunch of money at high-risk borrowers, without understanding how unlikely they were to repay it given that we were all a bunch of amateurs and there was little data to work from. Yes, my choice, and it was quite a learning experience. But the nature of P2P is that it is the responsibility of the facilitator (Prosper, Zopa, whomever) to do some handholding of the lenders, or else its capital base will get vaporized.

Consequently, shortly after I ended my activities, Prosper chose to exclude the bottom tiers of creditworthiness from its site. Since then, total returns have markedly improved, and lender participation (and hence origination and servicing fees) with it.

So, some regulation is necessary. But it needn’t be government regulation. The incentives of the facilitator are very much strong enough to protect the lenders and borrowers both, as we all learn more about the nature of the beast.

I’m not sure what sort of “regulation” is intended here, but I would point out that (in the US, anyway) the regulation of loan terms and lending processes has long fallen under the rubric of consumer protection. In other words, it is entirely possible that the regulators are seeking to impose in the peer-to-peer lending setting the sorts of disclosures, fee caps, “fair lending” standards, etc., that apply to banks and other regulated lenders. While I don’t agree with that I understand the rationale for it. If one accepts the premise that ordinary individuals are relatively unsophisticated in financial matters as compared to commercial borrowers (not an unreasonable proposition), it’s a short step to the sorts of consumer lending regulations we see today. I’m not surprised that it is being applied to “peer-to-peer” lending; in fact, the only real surprise is that it has taken them this long to get around to it.

I’d suggest a 3rd, sadder, but more innocuous theory: Zopa believes the general population views unregulated financial institutions with a jaundiced eye; becoming regulated will actually increase their reputation and revenue beyond the costs the regulations impose.

In time, as P2P lending grows, it’s imminent that some of the big boys will saddle it. Musculing in with their big pots of money, they’ll drive the rates down to much less attractive rates for small lenders. One of the major platforms is in talks with one of the big banks and is already suspected for insider dealing (investors raised their suspicions on their forum but it looks they are totally unfazed).The use of bots,api are things out of reach for Joe who’s wondering where to put his hard earned £10k.

Glad you brought that up, as that is one of the four key motivations for government regulation. The fourth, not mentioned so far (unless I missed it) is limitation of liability. This is most common in industries such as transportation or nuclear power, that have significant risk of liability.

Anyone who wants to be able to advance the libertarian argument against government regulations needs to understand these four motivations behind government regulation of industry. Note also that none of them is in the public interest.

Peer-to-peer “lending”, (at ASTONISHING interest rates), has ALWAYS been “regulated”.
Usually with the “first notice” involving a broken leg (or some other such distress).

“Whiners” who don’t want risk THAT kind of gambling are free to seek out “officially recognized” lending
if they want “the State” to act as referee. Ooooo…. not “qualified”? Why IS that exactly?

Unlike “The Merchant of Venice” when the “clever transvestite” beat out the “Filthy Jew Moneylender”
out of his contractual due, without addressing any subsequent alternative recourse on the clearly outstanding “principal”, in stead.

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